Agricultural Growth And Poverty Reduction

In the past decade, solid empirical evidence has emerged that agricultural growth is not only effective in alleviating rural poverty, but it is more effective than industrial growth in reducing urban poverty. Researchers have begun to assemble and study richer data sets on rural and urban income distributions than were previously available. Martin Ravallion and Gaurav Datt analyzed data from 33 household surveys in India over the period from 1951 to 1991, and they came to the following unambiguous conclusions:

Both the urban and rural poor gained from rural sector growth. By contrast, urban growth had adverse distributional effects within urban areas, which militated against the gains to the

Both primary and tertiary sector growth reduced poverty nationally and within urban and rural areas. By contrast, secondary sector growth had no discernible positive effect on the poor in either urban or rural areas.. . .

Our investigation points clearly to the quantitative importance of the sectoral composition of economic growth to poverty reduction in India. Despite the rising urbanization of Indian poverty, it is likely to remain true for many years to come that - from the point of view of India's poor - it is the dog (the rural economy) that wags the tail (the urban sector), not the other way around. Fostering the conditions for growth in the rural economy - in both primary and tertiary sectors - must thus be considered central to an effective strategy for poverty reduction in India.24

Klaus Deininger and Lyn Squire at the World Bank assembled a multi-country time series of household income data which permit analysis of the relationship between agricultural growth and poverty reduction for more countries.25 Peter Timmer combined the observations of highest quality from these data with time series on real per capita incomes (for entire countries) adjusted for purchasing power equivalents, to analyze the agriculture-poverty reduction linkage for a sample of 27 countries. His analysis explored the relationship between income per agricultural worker and poverty levels over time, whereas Ravallion and Datt had looked at income per unit of agricultural land.

Timmer uses a model that tries to capture long-term relationships between economic growth and income of the poor, as opposed to measures of how the poor are affected by short-term economic fluctuations. He found different results for countries that had relatively even income distributions and those that had very skewed income

24. Martin Ravallion and Gaurav Datt, 'How important to India's poor is the sectoral composition of economic growth?', The World Bank Economic Review, 10(1), January 1996, p. 19.

25. Klaus Deininger and Lyn Squire, 'A New Data Set Measuring Income Inequality', The World Bank Economic Review, 10(3), September 1996, pp. 565-591.

Thomas Vollrath summarized empirical evidence indicating that agricultural growth contributes more to the economy than other sectors' growth does:

Upon examining the contemporary record. . . Houck (1986) ascertained that agricultural growth had a more pronounced impact on increases in developing-country income than did growth in the nonagricultural sector. He found that a 10 percent rise in agricultural productivity was associated with a 9.0-10.2 percent increase in per capita GDP. By contrast, a 10 percent rise in manufacturing productivity was associated with only a 1.5-2.6percent increase in per capita GDP across countries. . . . Hwa's (1988) cross-country empirical analysis. . . . found that agricultural growth contributed more to economic growth than did export growth. . . . Bautista (1990) empirically examined agricultural growth linkages with the rest of the economy among 34 food-deficit developing countries. He found the growth-linkage elasticity to be greater than unity. . . . [at] 1.3 for the 1961-84 period and 1.4 for 1973-84.

distributions. In the former group of countries, increases in agricultural income per worker lead to increased incomes at the economy-wide level in all income strata (where rural and urban households are aggregated together), with the greatest effect seen in the lowest strata. Thus, in these economies improvements in labor productivity in agriculture generate growth throughout the economy, and more so for the poor, so they make the income distribution even more equitable over time. However, in economies that start out with highly skewed income distributions, the richer strata benefit substantially from improvements in agricultural productivity, but the poor benefit much less from productivity growth in both agriculture or in non-agriculture, so the income gap continues to widen regardless of the sectoral composition of growth.26

For a larger sample of 35 countries, with all types of income distributions, Timmer found that:

A one percent growth in agricultural GDP per capita leads to a 1.61 percent increase in per capita incomes of the bottom quintile of the population in 35 developing countries. A similar one percent increase in industrial GDP increases the incomes of the poor by 1.16 percent.27

He noted that the statistical significance of these results is poor because of 'noise' in the data, but concluded 'they do suggest that, on average, the sectoral composition of growth affects the strength of the linkage between economic growth and poverty'.

These results may not appear very different numerically, but extrapolated over a decade or decades they potentially represent a large difference in the incomes of the poor. The importance of agricultural growth may be seen by comparing the effects on the incomes of the bottom quintile of 4% annual growth in per capita income, sustained over 20 years, in industry versus agriculture. As a result of industrial growth at a rate of 4 % per capita, in 20 years the incomes of the poorest would have increased by 2.5 times, according to Timmer's results. In contrast, with agricultural growth of 4% per capita, in 20 years those incomes would have increased by 3.5 times.

In a subsequent piece, Timmer argues on the basis of observed experience that 'the East and South-East Asian approach of "growth with redistribution", relying heavily on stimulation of the rural economy, in combination with a policy to stabilize domestic food prices, is the fastest approach to managing this escape [from hunger and famine]'.28 He concludes by amplifying a theme of Johnston and Mellor in their early work, regarding the role of small farms, and addresses the issue of relative prices:

It is clearly difficult to find a way to structure the growth process so that the poor gain in relation to the rich. Historically, the only way to do that has been a rural-oriented development strategy that raises productivity and incomes of the broad population of small farmers and other rural workers. . ..

Such a strategy, however, requires significant price incentives to create the rural purchasing power that, in turn, stimulates the rural growth needed to make the strategy consistent with overall macroeconomic performance. . ..

This 'food price dilemma', in which poor consumers have their food intake threatened in the short run in order to fuel a long-run growth process that removes them from poverty, has been emphasized before. . . . But experience in East and Southeast Asia since the 1970s shows that such a strategy, when implemented in the context of large-scale investments in rural

infrastructure, human capital, and agricultural research, can lead to economic growth and an increase in average incomes per capita of 5 percent per year or more, with the rate of growth in the bottom two quintiles faster than that in the top. . . .29

Mellor has synthesized the survey data analysis of Timmer, Ravallion and Datt, and other studies, arriving at the following broad conclusions:

It is now clear that high rates of economic growth may rapidly reduce the proportion of the population in absolute poverty. In low-income countries, rapid overall growth is likely to be accompanied by rapid growth of the agricultural sector, because virtually all low-income countries have large agricultural sectors encompassing the majority of the population. There has been a tendency to generalize that economic growth reduces poverty, when in fact it is the direct and indirect effects of the agricultural growth that account for virtually all of the poverty decline. . . .

it is notable that agricultural growth reduces inequality among the poor as well as lifting the poor above the poverty line. . . .

emphasizing agriculture in order to improve income distribution does not result in slow growth. The sectors are more complementary than competitive.. . .30

A corollary to these lessons about the importance of agriculture, both in the overall economy and for poverty reduction, is that appropriate agricultural policies are crucial for the entire development process. In the words of Gale Johnson:

It is hard to understand how the role of policies can be ignored, given the enormous differences in the economic performances of the planned and market economies between 1950

and 1990 and the sharp change in the rate of growth in China following the reforms of the late 1970s.

.. . much of the concern over future world food supplies is based on the assumption that land is the limiting resource. This is putting the emphasis in the wrong place. The major factors that may limit the growth of food production in developing countries are knowledge and research, the availability of nonfarm inputs at reasonable prices, and the governmental policies that affect incentives. If policies provide for the first two and do not discriminate against agriculture in trade and macroeconomic policies, farmers will do the rest.31

In today's international economic environment, many observers have expressed concerns about the effects of globalization and free markets on agriculture, and hence on levels of rural poverty, in developing countries. For this reason, sometimes a recommendation is made to return to pervasive State controls over developing agriculture. It is a central contention of this book that the negative effects of globalization and distortions in international markets can be largely corrected without incurring the economic costs of centralized controls, by using indirect instruments of national economic policy, and that appropriate policies can create a favorable economic environment for agricultural growth and for the reduction of rural poverty. By now, there are many examples of pro-agriculture and pro-poor policies in the developing world, and one of the aims of this book is to present them and discuss them in a systematic way.